Has Market Established Interim and Long-Term Technical Resistance?

At the moment, the S&P 500 is in the process of stalling out at its 50-day exponential moving average, which raises concern that this area may be near-term trading resistance, and raising the prospect of a bearish “head and shoulders” trading pattern (which some traders view as signifying a long term trend reversal).

Meanwhile, the Dow Jones World Stock Index and Dow Jones Global 1800 Index have both observed resistance just under their respective 200-day and 50-day exponential moving averages, confirming these areas as both long-term and near-term trading resistance, and establishing a new long-term and intermediate-term bearish trends for global equities.

Even more troubling, the 50-day exponential moving average has dropped to, and will cross below, the 200-day exponential moving average for the Dow Jones World Stock Index, and has already dropped below the 200-day exponential moving average for the Dow Jones Global 1800 Index.

This “death cross” represents a bearish reversal pattern that many traders follow, and we have seen it replicated across many (but by no means most) global equities ETFs (including Vanguard Total World Stock ETF (NYSEARCA:VT)) and (SPDR S&P World ex-US ETF (NYSEARCA:GWL)).

But markets are volatile and prone to whipsawing traders who get into positions too early, so any trading pattern should be viewed as suspect until it is confirmed. A sharp move lower on the Dow Jones World Stock Index and Dow Jones Global 1800 Index would confirm that the 200-day and 50-day exponential moving averages are, in fact, resistance, and that the “death cross” pattern is not just a fluke.

In sum, from a purely technical perspective, the markets remain poised at dangerous inflection points. A solid move above the 50-day exponential moving averages for most global and US equities indexes would go a long way towards neutralizing the bearish case, and could, in fact, set the stage for a significantly higher move.

Simply put, the bears have managed to take the markets down to the matt, and gotten so close to getting the job done, short positions have been piled high and conviction is growing extreme. Such are the conditions where bearish traders frequently have their shorts scorched by Mr. Market, so a bullish break higher could be most rewarding for equities investors.

By the same token, if the markets continue to hesitate at their moving averages, or make a continued move lower, then it may well come to pass that most all equities indexes will form up “death cross” patterns. That would come as a “weapons free” call to bearish traders, and potentially send the markets reeling lower.

One trading day will not prove much of anything, though. But the next week or two likely will. Until then, expect headlines that refer to investors reacting to such things as “earnings jitters,” “double dip recession anxiety,” “sovereign debt worries” and “oil spill concerns.” Read these headlines if you wish, but in all likelihood, the true explanation behind whatever the markets end up doing will have more to do with resistance levels at the 50-day and 200-day moving averages.